Brief for the Respondent — Amer. Surety Co. v. Bethlehem Bank

FILE COPY hi-tiintun es

FIL.wD

OCT 21 :31]

| CABLES ELWOME CAOPLEY

OLERK

IN THE

Supreme Court of the Anited States

Ocronern Trim. 1941.

\urnteax Surery Company or New Youn, Petitioner,

V.

Tour Bermieuem Narioxat Bank or Berucenem, PEN NsYL-

vanta, apd LL. M. Reep. Receiver, The Bethlehem Na

tional Bank of Bethlehem, Pennsvivantia, Respoudents,

BRIEF FOR THE RESPONDENTS.

Grongr PL Banse

(Couns | for Comptrolier of

the Currency),

Attorney for Be sponds wes.

PP. MeFappes,

Ie thlehem, Pennsvivania,

Of Counsel,

+ Rey Srover,

'soqaetT BreKkincuam,

ican Berne,

As-istant Counsel for

(oniptroller of the Currency),

Of Counsel,

Pesso Or ByRon SS. Adams. Washi naton, D.C

INDEX.

Subject Index.

Bae, mmmenry Of Avamment . coc cc ccccsccccccccccecs

PD ata oie a ee rae elu aa hes

A—The claim of a surety for reimbursement must

be measured by the amount the surety actually

pays the principal’s creditor under the re-

quirements of the surety’s bond. The fact of

insolvency of his principal does not permit en-

hancement of, or increase in, the face amount

of said claim as permitted to be filed in the

insolvency proceedings as a basis of dividend

payments thereon te the surety from the estate

Or oo o'l re id. an bee bade cas

(1)—It is settled law that the claim of the

surety for reimbursement from the prin-

cipal, or from the estate of the principal,

must be measured by the amount paid by

the surety to the creditor of the principal

under the requirements of the surety

bond. This is the measure of recevery,

irrespective of whether reimbursement

ig sought upon a claim of indemnity, or

under a claim of subrogation ..........

(2)—It would seem entirely clear, in principle,

that the fact that the principal has be-

come insolvent, and has been placed in

liquidation proceedings, does not permit

enhancement of, or increase in, the facfe

amount of the provable claim of the

surety in the liquidation proceedings. As

Index Continued.

Page

previously indicated, the basis of reim-

bursement of the surety is measured by

the amount he is required to expend for

the benefit of the creditor under bond.

Any possible doubt in this connection,

so far as concerns provable claims

against insolvent national banks in re-

ceivership, is removed by the provisions

of section 5236, Revised Statutes, (Sec.

194, Title 12, U. S. C.), requiring ratable

dividends, and by construction of the

statute by the courts, to the effect that

the claims established thereunder must

be in the amount owing to the claimant

by the bank as of the date of closing of

ETE 6 0 0 6 0666000 6400494600005 c0% 8

B—It would be inequitable to the general deposi-

tors and creditors of the receivership bank to

allow the surety company, by subrogation or

otherwise, a claim, as the basis of dividends,

in the sum of $135,000, representing the full

amount of the deposit of the commonwealth at

the time of the suspension or closing of the

SN io uo 6000 bbe0essecudecesiesseéenescess 9

(1)—-The deposit balance to the credit of the

Commonwea!th on the date of suspension

or closing of the bank was more than

double the amount permitted by the State

statute and hence, to the extent at least

of the excess, was illegal .............. 10

(2)—In balancing the equities, the general de-

sitors and creditors of the receivership

ank are entitled to have the benefits of

the surety bond, rather than to have it

weighed in the balance against them. The

District Court, (R. 16-17) and also peti-

tioner, in adopting (page 15 of his peti-

tion for writ of certiorari) the position

and reasoning of the District Court—to

the effect that the general depositors and

creditors of the bank would be receiving

a ‘‘windfail’’ by reason of ‘‘purely for-

™

. ‘ one neem eee NS NTN ES 8 SY

Index Continued. iii

Page

tuitous’’ (R. 17) circumstances, in con.

sequence of the execution of the surety

bond-——were clearly in error, both in rea.

soning, and in the assumptions of fact,

upon which reliance was made ......... 14

6

(‘—The case of Merrill v. National Pank of Jack-

sonville, (1899) 173 U. S. 131, relied upon by

petitioner, does not support his position, but,

to the extent applicable to the instant case,

supports the position of respondent ........ 22

(1)—Analysis of the Merrill case ........... 22

(2)—Comments end observations concerning

the Merrill vase in so far as it may apply

to, or may be distiguished from, the in-

Se Ab an Neen decad ewecneawees ees 24

Ws RT cit cig cddaenedehhdne aeedeeecenna 27

Wis SEE 6 Gn & bebo nce euredveseesesduvenceesvin 28

CASES CITED.

Page

Aetna Life Insurance Co. v. Middleport, (1888) 124

FF Perr rrr ree enehnneéceuces 10

American Surety Co. v. De Carle, (C. C. A. 9th, 1928)

Ts 5... Gussie nseececeaeuhiaseeesaieees 35

American Surety Co. v. Westinghouse Electric Manu-

gS eee 7

Bates v. Swiger, 40 W. Va. 420, 21S. E. 874.......... 12

Batsell v, Richards (Tex. 1891), 16 S. W. 313........ 7

Board of Commissioners v. Strawn, (C. C. A. 6th, 1907)

Pt? 17. cease kanee keen eiedacueoneke 12

Boyer v. Bolender, 129 Pa. 324, 18 Atl. 127 .......... 12

Brown v. Thompson, et al., 128 S. E. 309,99 W. Va. 56 7

City of Fort Worth v. McCamey (C. C. A. 5th, 1937)

_ 93 F (2d) 964, cert. denied 304 U.S. 571.......... 9

City of Oakland v. Hartford Accident & Indemnity Co.,

(C. C. A. 6th, 1936) 81 F’. (2d) 717 .............. 35

Commonwealth v. U.S. F. & G. Co., (Pa. 1934) 170 Atl.

Cae Joewcchsunbedueneeeate ' ‘dithatweeons ws 18

iv Incex Continued.

445 ae 00 ae od PAN AT AEE Owen aOR eae e OO ek AE

Coonrod v. Kelly, (C. C. A. 3rd, 1902) 119 Fed. 841. .13, 14

Dairymen’s Co- operative Sales Co. v. Maryland Cas.

Co., (1934) 11 F. Supp. 423, aff. C. C. A. 78 F.

I oe a ee et yas, 37

oun v. Elmira Savings Bank, (1896) 161 U.S. 275.. 37

Eshleman v. Bolenius, 144 Pa. 269, 22 Atl. 758....... 12

Faires v. Cockerell, 31 S. W. 190, 88 Tex. 428 ........ 7

Fimamv. State of So. Dak. (C. C. A. 8th, 1928) 29 F.

(ah) 776, cert. denied 279 U.S. 841 ............ 12

Ft. Dodge Building & Loan Association v. Scott, (Iowa,

og SR SY ee ree 13

Fouts v. Maryland Casualty Co., (C. C. A. 4th, 1939)

i SR en. nae c eine a gest aussie as 39

Galliland v. Williams, 181 Ala. 173, 61 eS 12

German Savings and Loan Society v. Tull, (C. C. A.

en I oe eo 12

Gifford v. Rising (Sup. Ct. N. Y. 1891), 12 N. ¥Y. 8.430 7

Huey v. Brand, (1936) 92 S. W. he ike ERE es 32

In re Freeman & Brooks (C. C. A. 7tb, 1924), 1 F. wit

ir le els eg ne bas Se huh 6.0.0 5s 7

In re Harr, (Pa. BS. (t., 3935) 179 Atl. 725... 6c censs 22

In re Kent Refining Co. (W. D. Mich., 1937), 20 F.

i eres rie ase a Kew Uak eek Wa De ae aan 7, 26

In re Deumeciiben Motor Car Co. (Mass., 1924), 299

RR Cl a hg a aaah 5g 7

In re South Philadelphia State Bank’s Insolvency,

(1929) 295 Pa. 433, 145 Atl. 520 ................ 19

In re Thompson, (W. D. Pa., 1924) 306 Fed. 215...... 36

Jennings v. U.S. F. & G. Co., (1935) 294 U.S. 216.... 0 37

Justice v. Empire State Surety Co., (Pa., 1953) 209

io Se SUR US Re 37

Krebs v. Bezler (Mo., 1936), 89°S7 W. (2a) ae 7

Lacy v. Maryland Casualty Co. (C. C. A. 4th, 1929), 32

F. (2d) “Ae alti aan eee a rah enna am

Lidderdale’s Executors v. Executor of Robinson,

SE Oui vu ns cca beeks cuende sake mews 37

Maryland Casualty Company v. Cox, (C. C. A. 6th,

Se We se i 6 Suv ed hos caduavauacvenss

McCandless v. Dyar (S. D., 1928), 34 F. (2d) 989...... 9

McDonald v. Chemical National Bank (1899), 174 J. S.

SoG SH 0a k cue his ENE beans dee oeutaeeees

“Index Continued. Vv

Page

Memphis & Little Rock Railroad +. Dow, (1887) 120

i Serre pert re rr ere rrr Tere

Merchants National Bank v. Schoo] District, (C. C. A.

Me Ok 8 eerrrerre frer reer rier rr 12

Merrill v. National Bank of Jacksonville, (1899) 173

Bs ae as sc eae ko ce eee esas eae 5, 9, 22

Meyers v. Bank of America Nat. Trust & Savings

Ass’n., et al. (1938), 77 Pac. (2d) 1084..........

Montgomery v. Ward, (Ala., 1933) 151 So. 583 ....... 12

Morrah v. The First National Bank, 65 S. W. (2d) 830 31

Napier v. Duf, (1939) 281 Ky. 779, 136 S. W. (2d) 10837

Old Company’s Lehigh v. Meeker, (1935) 294 U.S. 227 37

Penn. R. Co. v. Fidelity & Deposit Co., (C. C. A. 3rd,

ee ee hs ee EE ro ek cccue ye caeeeks sees’ 22

Phipps v. Fuqua (Tex. Civ. App. 1930), 32 S. W. (2d)

660

ce hae Kate ig Gian lank ae we Wiel oo 60 e-y 9 7

Porter v. Ourada, (Nebr. 1897) 71 N. W. 52.......... 13

Poweshiek County v. Merchants Nat. Bk., (Iowa, 1928)

I A a oN Se alg 12

Reserve Loan Life Insurance Co. v. Dulin (Ind. App.

eR lk Oy ere Pe ree 7

Ross v. Lee (S. D. Fla. 1936), 15 F. Supp. 972, 973 ..... 9

Royal Indemnity Co. v. White Engineering Corp., 120

PE SE BO ie Ss I ca hk can seer esseveysee 7

Scott v. Armstrong, (1892) 146 U.S. 499............. 9

Shaw v. New Amsterdam Cas. Co. (1933) 310 Pa. 213,

Se St Sak ee even es 36

Smith v. Wells, (Ind. 1919) 122 N. E. 334............ 7

Sokoloff v. Fidelity and Casualty Co., (1927) 288 Pa.

Be Re ee re ener ee 22

Steele v. Randall (C. C. A. 8th, 1927), 19 F. (2d) 40... 9

The Livingstone (C. C. A. 2nd, 1904) 130 Fed. 746.... 7

The Old National Bank v. Swearing, 72 S. W. (2d) 545;

I a ob we 63 oe 4 aw Oe a LAS «a 31

Troyer v. Bank of Dequeen, (Ark. 1926) 281 S. W. 14. 12

Union Indemnity Co. v. Stevens, (C. C. A. 5th, 1932),

Oe bial cr ada cou chaSkeewav aware 7

United States Fidelity Company v. Weoldridge, (1925)

EM EE 6 cs eda bake uhewe kEeu wane ee ae 16

U.S. F. & G. Co. v. Hood, (1934) 206 N. C. 639, 175

ori 64 so thad en eds andes e seus ereKe 26

U.S. N. B. of Centralia v. City of Centralia, (C. C. A.

9th, 1917) 240 Fed. 93, cert. denied 243 U.S. 656.. 12

vl Index Continued.

Wallace v. Benner, (1931) 156 S. E. 799

Ward v. First Nat. Bank of Caruthersville, (C. C. A.

ee A Oe ere er rere 26

White ¥, BRBOR, TPE) BFE Us B. 6OOs 6 6 veccicc dence, 9, 23

Withers v. D’Auria Bank & Trust Co. (1987) 122 N. J.

ee eS eee rere ee Tree 26

Young v. American Bonding Co., (1910) 228 Pa. 373,

SET ag he ee a oo AO eee 18, 21, 36

STATUTES CITED.

Page

Section 5236, Revised Statutes ..... 1.25. ccesceveses 4,8

Se Ae a i as ho ies eee ece es ver eenee ss 4,8

See. 3812, Title 72, Purdon’s (1936) Pa. Stats. ....... 1]

See. 3791, Title 72, Purdon’s (19386) Pa. Stats. ....... 1]

MISCELLANEOUS CITATIONS.

i ee ea what e hee is Gala 14

ey ag I is BR SURO «Cuba eu Seen neeedsaen vows 13

ee ec ark hued us hee ee ae ae Ye Aa 6,7

Oe ec ade UaceNecueu de seee cas ie Sauk ss 2

Fb eS eae re irene ee hres a

Se res OE oko 4 bine GAS weed RN ae oad Ae 7

Restatement of the Law—Restitution—See. 162 (¢) ... 6

Sheldon on Subrogation, (2d Ed.) See. 4, p.5 2.2.2... 10)

APPENDIX.

Administrative Code of Pennsylvania ............... a

ee os a on ee eV Cees wee eas 28

a SERN RA re a

IN THE

Supreme Court of the Anited States

OcroBER TERM, 1941.

No. 29.

American Surety Company or NEw York, Petitioner,

v.

Tue BETHLEHEM NATIONAL Bank or BETHLEHEM, PENNsyYL-

vania, and L. M. Reep, Receiver, The Bethlehem Na-

tional Bank of Bethiehem, Pennsylvania, Respondents.

BRIEF FOR THE RES?PONDENTS.

I.

THE FACTS.

The facts are not in dispute. The case was decided upon

the pleadings, (consisting of the bill of complaint and ex-

hibits thereto attached (R. 2-10), and the motion to dismiss,

—k. 10) as supplemented by twe stipulations of counsel (R.

11-13; 21-22). The allegations and statements comprised

within the pleadings and the stipulations, are summarized

in the petition for writ of certiorari (pp. 2-4; 9-10).

However, in view of the fact that the bond securing the

deposit of the Commonwealth of Pennsylvania (signed by

9

i

the bank as principal, and by petitioner as surety), was

dated and became effective as of December 10, 1928, whereas

the bank was placed in conservatorship on March 15, 1933,

it was deemed appropriate to remove any doubt that might

be entertained,—from the face of the record,—as to whether

the bond had been kept continuously in force and effect by

the payment by the bank to the surety of the required annual

premiums during said period. Hence, by agreement of

counsel, a letter was written by counsel for petitioner, dated

October 10, 1941, clarifying the record in this respect, with

the understanding, as indicated in said letter, that the facts

therein stated should be

‘‘submitted to the Supreme Court of the United States

for its consideration to the same extent and effect as

if included in the formal transcript of record, and that

our agreement in this regard may be evidenved by the

insertion of a copy of this letter as an appendix of

Respondents’ brief which you are about to file.”’

Accordingly, a true copy of said letter of October 10, 1941,

is contained in the appendix hereof at p. 28.

Attention is also directed to an inadvertent but erroneous

assumption of fact by the District Court to the effect that

the surety bond in question had been ‘‘bought and paid

fer’? by the Commonwealth of Pennsylvania (R. 16):

‘*On the one hand, it the surety be allowed dividends

on the full amount of the creditor’s claim, they will

be based upon an amount in excess of what he has ex-

pended, whereas the general creditors will be sharing

only on the basis of their actual advancements. If,

on the other hand, the surety is limited to the amount

which he has actually paid as the basis of his claim,

then the general creditors get a windfall, for no other

reason than that one of them has bought and paid for

additional protection which none of the others chose

to take—for, of course, if there had been no surcty-

ship, the creditor would be proving and receiving divi-

dends on the full amount of his claim.’’ (Italics in-

serted)

3

II.

QUESTIONS PRESENTED.

The questions presented are summarized in the following

extract from the opinion of the court below: (R. 16)

‘‘The question before the court on this appeal is the

basis upon which the plaintiff surety might prove and

receive dividends, Plaintiff takes the position that it

is entitled to dividends upon the full amount of its

obligee’s original bank claim which was $135,000. The

court below, after a carefully prepared and thought-

fully reasoned opinion, sustained the plaintitf’s view.

The receiver contends that plaintiff is entitled to par-

ticipate in the liquidation of the bank to the extent of

a claim of $68,588.56, the amount it actually paid to

the Commonwealth. There is also the question of

whether the plaintiff is entitled to interest upon further

dividends which have been declared and paid to other

creditors, but which the plaintiff has not received.”’

III.

SUMMARY OF ARGUMENT.

A.

THE CLAIM OF A SURETY FOR REIMBURSEMENT

MUST BE MEASURED BY THE AMOUNT THE

SURETY AUVTUALLY PAYS THE PRINCIPAL'S

CREDITOR UNDER THE REQUIREMENTS OF

THE SURETY’S BOND. THE FACT OF INSOL-

VENCY OF HIS PRINCIPAL DOES NOT PERMIT

ENHANCEMENT OF, OR INCREASE IN, THE

FACE AMOUNT OF SAID CLAIM AS PERMITTED

TO BE FILED IN THE INSOLVENCY PROCEED-

INGS AS A BASIS OF DIVIDEND PAYMENTS

THEREON TO THE SURETY FROM THE ESTATE

OF HIS PRINCIPAL.

(1) It is settled law that the claim of the surety for re-

imbursement from the principal, or from the estate of the

principal, must be measured by the amount paid by the

4

surety to the creditor of the principal under the require-

ments of the surety bond. This is the measure of recovery,

irrespective of whether reimbursement is sought upon a

claim of indemnity, or under a claim of subrogation.

(2) It weuld seem entirely clear, in principle, that the

fact that the principal has become insolvent, and has been

placed in liquidation proceedings, does not permit en-

hancement of, or increase in, the face amount of the prov-

able claim of the surety in the liquidation proceedings. As

previously indicated, the basis of reimbursement of the

surety is measured by the amount he is required to expend

for the benefit of the creditor under bond.

Any possible doubt in this connection, so far as concerns

provable claims against insolvent national banks in re-

ceivership, is removed by the provisions of section 5236,

Revised Statutes, (Sec. 194, Title 12, U. 8. C.), requiring

ratable dividends, and by construction of the statute by

the courts, to the effect that the claims established there-

under must be in the amount owing to the claimant by the

bank as of the date of closing of the bank:

B.

IT WOULD BE INEQUITABLE TO THE GENERAL DE-

POSITORS AND CREDITORS OF THE RECEIVER.

SHIP BANK TO ALLOW THE SURETY COMPANY,

BY SUBROGATION OR OTHERWISE, A CLAIM,

AS THE BASIS OF DIVIDENDS; IN THE SUM OF

$135,000, REPRESENTING THE FULL AMOUNT OF

THE DEPOSIT OF THE COMMONWEALTH AT

THE TIME OF THE SUSPENSION OR CLOSING OF

THE BANK.

(1) The deposit balance to the credit of the Common-

wealth on the date of suspension or closing of the bank was

mre than double the amount permitted by the State

statute and hence, to the extent at least of the excess, was

illegal.

5

(2) In balancing the equities, the general depositors and

creditors of the receivership bank are entitled to have the

benefits of the surety bond, rather than to have it weighed

in the balance against them. The District Court, (R. 16-

17) and also petitioner, in adopting (page 15 of his peti-

tion for writ of certiorari) the position and reasoning of

the District Court—to the effect that the general depositors

and creditors of the bank would be receiving a “windfall”

by reason of “purely fortuitous” (R. 17) circumstances, in

consequence of the execution of the surety bond—were

clearly in error, both in reasoning, and in the assumptions

of fact, upcn which reliance was made.

C.

THE CASE OF MERRILL v. NATIONAL BANK OF

JACKSONVILLE, (1899) 173 U. 8. 131, RELIED

UPON BY PETITIONER, DOES NOT SUPPORT HIS

POSITION, BUT, TO THE EXTENT APPLICABLE

TO THE INSTANT CASE, SUPPORTS THE POSI-

TION OF RESPONDENT.

(1) Analysis of the Merrill case:

(2) Comments and observations concerning the Merrill

case in so far as it may apply to, or may be distinguished

from, the instant case:

6

IV.

ARGUMENT.

A

THE CLAIM OF A SURETY FOR REIMBURSEMENT

MUST BE MEASURED BY THE AMOUNT THE

SURETY ACTUALLY PAYS THE PRINCIPAL'S

CREDITOR UNDER THE REQUIREMENTS OF

THE SURETY’S BOND. THE FACT OF INSOL-

VENCY OF HIS PRINCIPAL DOES NOT PERMIT

ENHANCEMENT OF, OR INCREASE IN, THE FACE

AMOUNT OF SAID CLAIM AS PERMITTED TO BE

FILED IN THE INSOLVENCY PROCEEDINGS AS

A BASIS OF DIVIDEND PAYMENTS THEREON

TO THE SURETY FROM THE ESTATE OF HIS

PRINCIPAL.

(1) It is settled law that the claim of the surety for re-

imbursement from the principal, or from the estate of the

principal, must be measured by the amount paid by the

surety to the creditor of the principal under the require-

ments of the surety bond. This is the measure of recovery,

irrespective of whether reimbursement is sought upon a

claim of indemnity, or under a claim of subrogation.

‘‘Subrogation gives indemnity only. It cannot take

place beyond the amount actually disbursed under legal

necessity.’’ (60 C. J. page 724)

To tne same effect: (Restatement of the Law—Restitu-

tion—see. 162(c))

‘“‘e, Where obligation not fully discharged. Where

property of one person is used in partially discharging

an obligation owed by another, and the balance of the

obligation has not heen discharged, the former is not

entitled to be subrogated to the position of the obligee.

Until the obligation is fully discharged, the ob'igee is

himself entitled to enforce the balance of his claim,

and the person whose property has been used in dis-

Le A

/

‘

charging only a part of the claim is not entitled to

occupy his position. If the balance of the claim ts sub-

sequently discharged by the obligor, however, the per-

son whose property was used in discharging a part of

the obligation is entitled then to be subrogated to the

claim to the extent that his property was used m dis-

charging the claim. (Italics inserted)

‘*" trations:

‘*i. A owes B $100 and C is surety for A on the debt.

(‘ pays B $25 in part payment of the debt. C is not en-

titled to be subrogated to B’s claim against A, although

he is entitled to reimbursement from A.

‘*2. The facts are as stated in Illustration 1, except

that A has paid B the balance of the debt. C ts entitled

to be subrogated to B’s claim against A to the extent

of $25.’’ (Italics inserted)

Also see: Memphis & Little Rock Railroad v. Dow, (1887)

120 U. S. 287, 302; In re. Freeman & Brooks (C. C. A. 7,

1924), 1 F. (2d) 480, 434; Lacy v. Maryland Casualty Co.

(C.C. A. 4, 1929), 32 F. (2d) 48,53; Union Indemnity Co. v.

Stevens (C. C. A. 5, 1932), 57 F. (2d) 839, 840; In re Kent

Refining Co. (W. D. Mich., 1937), 20 F. Supp. 661, 662;

In re Metropolitan Motor Car Co. (Mass. 1924), 299 Fed.

320, 322; The Livingstone (C. C. A. 2, 1904) 130 Fed. 746,

749; Brown v. Thompson, et al., 128 S. E. 309, 312; 99 W. Va.

06; Napier v. Duff, (1939) 281 Ky. 779, 136 S. W. (2d) 1083,

1086; Smith v. Wells, (Ind. 1919) 122 N. E. 334, 338; Faires

v. Cockerell, 31 S. W. 190, 193; 88 Tex. 428; Phipps v. Fuqua

(Tex. Civ. App. 1980), 32 S. W. (2d) 660, 663; Reserve

Loan Life Insurance Co. v. Dulin (Ind. App. Ct. 1919), 122

N. E. 3, 7; Batsell v. Richards (Tex. 1891), 16 S. W. 313,

314; Royal Indemnity Co. v. White Engineering Corp., 120

Mise. 332, 198 N. Y. S. 264, 270; Krebs v. Bezler (Mo. 1936),

89 S. W. (2d) 935, 937 ; Gifford v. Rising (Supreme Ct. N. Y.

1891), 12 N. Y.S. 430; 25 R.C. L. pg. 1389; 60 C. J. pg. 724.

As to the functional similarity of operation of the reme-

dies of indemnity and of subrogation:

‘*A surety who has undertaken to pay the creditors of

the principal, though not beyond a stated limit, may

8

not share in the assets of the principal by reason of

such payment until the debts thus partially protected

have been satisfied in full. This is the rule where the

right to a dividend has its basis in the principle of

equitable subrogation. ‘A surety liable only fer part

of the debt does not become subrogated to collateral or

to remedies available to the creditor unless he pays

the whole debt or it is otherwise satisfied.’ United

States v. National Surety Co., 254 U.S. 73, 76. If the

holding were different, the surety would reduce the

protection of the bond to the extent of its dividend in

the assets of the debtor. Jenkins v. National Surety

Co., supra. The rule is the same, and for like reasons,

where the basis of the claim is the debtor’s promise to

indemnify, if the debtor is insolvent when the promise

is enforced. Jenkins v. National Surety Co., supra, at

pp. 266, 267.’" American Surety Co. v. Westinghouse

Electric Manufacturing Co, et al., (1935) 266 U.S. 1338,

137.

(2) It would seem entirely clear, in principle, that the

fact that the principal has become insolvent, and has b.-en

placed in liquidation proceedings, does not permit en-

hancement of, or increase in, the face amount of the prov-

able claim of the surety in the liquidation proceedings. As

previously indicated, supra, page 6, the basis of reim-

bursement of the surety is measured by the amount he is

required to expend fcr the benefit of the creditor under

the bond.

Any possible doubt in this connection, so far as concerns

provable claims against msolvent national banks in re-

ceivership, is removed by the provisions of section 5236,

Revised Statutes, (Sec. 194, Title 12, U. 8. C.), requiring

ratable dividends, and by construction of the statute by the

courts, to the effect that the claims established thereunder

must be in the amount owing to the claimant by the bank as

of the date of closing of the bank:

**$ 194. Dividends on adjusted claims; distribution

of assets

‘*From time to time, after full provision has been

first made for refunding to the United States any de-

9

ficiency in redeeming the notes of such association, the

comptroller shall niake a ratable dividend of the money

so paid over to him by such receiver on all such claims

as may have been proved to his satisfaction or adjudi-

cated in a court of competent jurisdiction, and, as the

proceeds of the assets of such association are paid over

to him, shall make further dividends on all claims pre-

viously proved or adjudicated; and the remainder of

the proceeds, if any, shall be paid over to the share-

helders of such association, or their legal representa-

tives, in proportion to the stock by them respectively

held. (R.S. § 5286.)”’

To the effect that the amount ef the provable claim for

dividend purposes must be the amount owing to the claim-

ant by the bank as of the date of closing of the bank, see:

Merrill v. National Bank of Jacksonville, (1899) 173 U.S.

131, 146; White v. Know, (1884) 111 U.S. 784, 786; Scott

v. Armstrong (1892) 146 U.S. 499, 511; City of Fort Worth

ve McCamey (C. CL. A. 5, 1987), 93 F. (2d) 964, $68; cert.

denied 304 U.S. 571; Steele v. Randall (C. C. A. 8, 1927),

19 F. (2d) 40, 42; MeDonald v. Chemical National Bank

(1899), 174 U. S. 610, 619; MeCandless vy. Dyar (S. D.

1928), 34 F. (2d) 989, 991; Ross v. Lee (S. D. Fla. 1936),

15 I’. Supp. 972, 973.

B.

IT WOULD BE INEQUITABLE TO THE GENERAL

DEPOSITORS. AND CREDITORS OF THE RE-

CEIVERSHIP BANK TO ALLOW THE SURETY

COMPANY, BY SUBROGATION OR OTHERWISE,

A CLAIM, AS THE BASIS OF DIVIDENDS, IN THE

SUM OF $135,000, REPRESENTING THE FULL

AMOUNT OF THE DEPOSIT OF THE COMMON.

WEALTH AT THE TIME OF THE SUSPENSION

OR CLOSING OF THE BANK.

It is settled doctrine that subrogation is entirely an equit-

able right, and it is not inevitably and inflexibly applied

or allowed in all cases. A general statement of the law in

10

this respect is contained in Sheldon on Subrogation, (2d

Ed.) see. 4, p. 5:

‘Ti is a Mode of Equitable Relief —Subrogation is

an exercise of the equitable powers of the court, to

relieve a meritorious creditor, who might otherwise be

subjected to loss by his funds being applied to pay an-

other’s debt, or by the operation of proceedings at law

against the estate or funds of one who is indebted both

to him and to others. This remedy is allowed only

when it does not conflict with the legal or equitable

rights of other creditors of the common debtor; and the

principle is one of equity merely, and will be carried

out in the exercise of a proper equitable discretion,

with a due regard to the legal and equitable rights of

others. One who ciaims this equity must be governed

by the common maxim, Sic utere tuo ut alienum non

laedas.’’

Also see Aetna Life Insurance Co. v. Middleport, (1888)

124 U.S. 534, 549, 550.

For the reasuns hereinafter indicated, it is considered,

that under the facts and circrmstances existing in the in-

stant case, the surety should not be allowed a claim against

the receivership, for dividend purposes, in excess of the

sum of $68,588.56, representing the amount paid by the

surety to the Commonwealth, under the terms of the bond.

(R. 4, 6)

It may well be, in view of the restrictions contained in the

State statutes relating to State deposits, hereinafter next

discussed, that the surety should not be allowed a claim in

excess of $62,500, inasmuch as that sum is the maximum

amount that could be legally deposited under a bond of

$125,000.00

(1) The deposit balance to the credit of the Common-

wealth on the date of suspension or closing of the bank was

more than double the amount permitted by the State statute

and hence, to the extent at least of the excess, was illegal.

‘The Pennsylvania statutes, hereinafter next quoted,

prohibit the deposit of state funds in a sum greater than

Z

Le

1]

one-half of the amount of the bond required to be furnished

by the depository. The amount of petitioner’s bond in the

instant case was $125,000.00 (R. 3). The amount of the

deposit to the credit of the Commonwealth at suspension

of the bank was $135,900.00 (R. 3). Therefore the maxi-

mum amount legally permitted to be on deposit under the

security of the $125,000.00 bond, was $62,500.00, thereby

revulting in an illegal excess of $72,500.00. The controlling

state statutes in this connection provide:

Sec. 3812, Title 72, Purdon’s (1936) Pa. Stats.

‘“‘The state treasurer before making such deposits

shall require each bank, banking institution or trust

company to give a good and sufticient bond, containing

a warrant of attorney to confess judgment in favor of

the commonwealth in double the amount of the con-

templated deposit, with sureties to be approved by the

board of revenue commissioners of the commonwealth

of Pennsylvania, and no deposit shall at any time be

greater than one-half of the amount of the bond fur-

nished by said depository. Ana, further, the said bond

or bonds so given shall include a special obligation to

settle with and pay to the state treasurer, for the use

of the commonwealth, the amount of interest as it shall

become due, semi-annually (1897, June 15, P. L. 157,

See. 2.)’’

Sec. 3791, Title 72, Purdon’s (1936) Pa. Stats.

‘‘ All banks, banking institutions, and trust companies,

selected as aforesaid, shall, upon the receipt of notice

of such selection as depositories of State moneys, fur-

nish a bond to secure payment of deposits and interest

to the Commonwealth of Pennsylvania, witb a proper

warrant of attorney to confess judgment in favor of

the Commonwealth, secured by a surety company or

individual sureties, to be approved by the Revenue Com-

missioners and Banking Commissioner, or a majority

of them, in double the amount of the deposit to be made,

and, if corporate bonds are given, no one company shall

be approved in an aggregate amount in excess of five

times its capital, surplus and reserve. (1906, Feb. 17,

P. L. 46, See. 5.)’’

ede]

12

(a) It is settled doctrine that public funds deposited in

a bank contrary to the requirements of statutes regulating

such deposits, constitute illegal deposits. See: Fiman v.

State of So. Dak. (C. C. A. 8th, 1928) 29 F. (2d) 776, 77s,

cert, denied 279 U. 8. 841; U. S. N. B. of Centralia v. City

of Centralia, (C. C. A. 9th, i917) 240 Fed. 93, 95; cert. de-

nied 243 U.S. 656; Merchants National Bank v. School Dis-

trict, (C. C. A. Yih, 1899) 94 Fed. 705, 706; Board of Com-

missioners v. Strawn, (C. C. A. 6th, 1907) 157 Fed. 49, 50;

Montgomery v. Ward—-(Ala., 1933) 151 So. 583, 585; Powe-

shiek County v. Merchants Nat. Bk., (lowa, 1928) 220 N. W.

63, 66.

(b) A claimant seeking subrogation must act fairly and

equitably and be free from fauit in the transaction in con-

nection with which he claims subrogation. He will not be en-

titled to subrogation where he derives his claim through or

from a wrongdoer.

To the foregoing effect see: Galliland ». Williams, 181

Ala. 173, 61 So. 291, 293; Boyer v. Bolender, 129 Pa. 324,

18 Atl. 127, 128; Bates v. Swiger, 40 W. Va. 420, 21 S. E.

874, 878; Montgomery v. Ward, supra; Eshleman v. Bolen-

ius, 144 Pa. 269, 22 Atl. 758, 759; Troyer v. Bank of De-

queen, (Ark. 1926) 281 S. W. 14, 16; German Savings and

Loan Society v. Tull, (C. C. A., 9th, 1905) 136 Fed. 1, 6.

Also see ‘‘ Additional Cases’’, App. p. 31.

As above indicated, supra, p. 10, the deposit balance to

the credit of the Commonwealth at the time of suspension

and closing of the bank, and for which claim was allowed

to the Commonwealth by the receiver in the sum of $135,000

represented moneys illegally deposited by the State Treas-

urer to the extent of $72,500, said sum constituting the ex-

cess over the permitted one-half of the depository bond.

Hed the deposits been restricted to the permitted amount

of $62,500, as enjoined by State statute, the assets of the

receivership would not have been required to respond for

said excess of $72,500. While it is by no means suggested

that petitioner participated in, or in any way was causally

13

responsible for, the making of said illegal deposits, never-

theless, the claim of the petitioner to subrogation in the

base amount of $135,000, is necessarily derived from, and

is a result of, the making of said illegal deposits by the

State treasurer, in that the proof of claim in that amount

allowed by the receiver to the Commonwealth embraces said

sum of $72,500.

Consequently, in the light of the doctrines established

by the hereinabove cited cases, (supra, p. 12) it would

seen clear that it would be inequitable and in contraven-

tion of the vested rights of the general depositors and

creditors of the receivership bank, to allow petitioner the

right of subrogation for any sum in excess of the sum of

$62,500, representing the maximum amount permitted to be

deposited, and constituting the maximum face an:ount for

which a claim should be allowed.

(c) Subrogation should not be allowed where the ciaim

sought to be charged and enforced against innocent third

parties—resulted from, or was caused by, the negligence

of the claimant.

To the foregoing effect see: Ft. Dodge Building & Loan

Association v. Scott, (lowa, 1892) 53 N. W. 283, 284; Coon-

rod v. Kelly, (C. C. A. 3rd 1902) 119 Fed. 841, 848; Porter

v. Ourada, (Nebr. 1897) 71 N. W. 52, 53; 60 C. J, par. 21,

pp. 708-709.

It would seem clear that petitioner, as surety upon the

depository bond, was chargeable with notice as to the re-

quirements of the State depository statutes including the

definite restriction upon the amount which could lawfully

be deposited. Petitioner was chargeable with notice that

recovery could not be had, through subrogation, as to

amounts illegally deposited in excess of the permitted

maximum under the bond, and it would therefore seem

necessarily to follow that petitioner was guilty of negli-

gence in not supervising the deposit account to the extent

of being kept constantly informed as to the balance thereof,

and that said balance was within the allowed maximum.

14

There can be no doubt that the books of the bank reflecting

the deposit entries were at all-times open to appropriate

inquiry on the part of petitioner as to the condition and

status of the deposit so far as amount was concerned.

Assuming and conceding that petitioner, as surety, was

an innocent party in the transaction, it is obvious that the

depositors and other creditors of the bank were likewise

innocent parties, and had no connection whatsoever with

the transaction in question. The equities, therefore, would

clearl¥. seem to be with the depositors and other creditors

under the recognized maxim. that where loss is sustained,

affecting two innocent parties, the one whose negligence or

other wrongful act made the loss possible shouid suffer the

loss. See: page 848 of Coonrod vy. Kelly, supra; and 60 C. J.,

p. 707.

(2) In balancing the equities, the general depositors and

creditors of the receivership bank are entitled to have the

benefits of the surety bond, rather than to have it weighed

in the balance against them. The cistrict court, (R. 16-17)

and also petitioner, in adopting (page 15 of his petition

for writ of ceriorari) the position and reasoning of the

district court—to the effect that the general depositors and

creditors of the bank would be receiving a “windfall” by

reason of “purely fortuitous” (R. 17) circumstances, in

consequence of the execution of the surety bond—were

clearly in error, both in reasoning, and in the assumptions

of fact, upon which reliance was made.

The district court, in stating the problem involved, and

in the course of indicating the basis of its decision against

the respondents, stated, in the opinion:

‘‘The ereditor, having been paid, and so eliminated

as a factor in the problem, it remains to balance the

surety’s rights and the interests of the general credi-

tors. It is not easy’to arrive at any solution which is

entirely satisfactory and leaves one free from doubt

as to the justice of the result. On the one hand, if

the surety be allowed dividends “n the fuii amount of

15

the creditor’s claim, they wiil be based upon an amount

in excess of what he has expended, whereas the gen-

eral creditors will be sharing only on the basis of their

actual advancements. If, on the other hand, the surety

is limited to the amount which he has actually paid as

the basis of his claim, then the general creditors get a

windfall, for no other reason than that one of them has

bought and paid for additional protection which none

of the others chose to tae—for, of course, if there had

been no suretyship, the creditor would be proving and

receiving dividends on the full amount of his claim.

‘‘On the whole, it seems to me that, if the real ob-

jective of tie doctrine of subrogation be kept in mind,

we come closer to distributing the loss fairly and avoid-

ing unjust enrichment of any interest by allowing the

surety to claim on the basis of the full amount of the

creditor’s claim. By so doing it may be possible to re-

imburse him fully, and still do entire justice to the

general creditors—for it can hardly be called unjust or

unfair to leave them exactly where they would have

been had there been no suretyship, with their rights

neither impaired nor enlarged by an arrangement with

which they had nothing to do and which was purely

fortuitous so far as they are concerned.’’ (Italics in-

serted)

As pointed out in the supplementary statement of facts

herein (supra, p. 2) the district court erroneously as-

sumed that the surety bond had been ‘‘bought and paid

for’’ by the Commonwealth of Pennsylvania, the state-

ment of the court in that connection being (as set forth in

the foregoing quotation) that aa

‘‘the genéral creditors get a windfall, for no other

reason than that one of them has bought and paid for

additional protection which none of the others chose

to take-—for, of course, if there had been no suretyship,

the creditor would be proving and receiving dividends

on the full amount of his claim.’’ (R. 16)

The fact is, however, as pointed out in the supplementary

statement of facts herein (supra p. 2) the surety bond

was ‘‘bought and paid for’’, not by the Commonwealth of

16

Pennsylvania, but by the bank, in 1928, and the bank paid

the annual premiums upon said bond to petitioner, for a

period of approximately five years prior to the appoint-

ment of the conservator for the bank in March of 1933.

(See letter of October 10, 1941, appendix hereof p. 28).

Still laboring under this mistake of fact, and placing

substantial reliance upon the fact thus erroneously as-

sumed, the trial court reasoned and concluded:

‘‘for it can hardly be called unjust or unfair to leave

them exactly where they would have been had there

been no suretyship, with their rights neither impaired

nor enlarged by an arrangement with which they had

nothing to do and which was purely fortuitous so far

as they are concerned.”’

The reasoning thus indulged, and the conclusion thus

reached, appears substantially inequitable to the general

depositors and creditors of the bank. The surety bond was

procured and paid for by the bank with the presumed in-

tent and expectancy that it would become operative in per-

formance and payment of the penalty therein provided,

cnly in the event of insolvency of the bank. There being no

question as to the fact that the bank would be obligated

to repay the deposits thereunder to the commonwealth from

time to time, as demanded, there could be no other reasor

and no other occasion or contingency, upon which payment

of the penalty under the bond would be required.

The surety bond must be considered, and relicd upon, as

an asset of the bank in receivership. As stated by this

court in United States Fidelity Company v. Wooldridge.

(1925) 268 U. S. 234, 238, in considering a fidelity bond re-

lied upon and collected by the receiver of a national bank:

‘*the right of the Railway Company was simply that

of a depositor, a right to share with other unsecured

creditors in the assets of the Bank, of which the bond

now in suit was a part.’’

17

The surety bond involved in the instant case was for the

benefit of, not only the Commonwealth of Pennsylvania as a

public deposito:, but it was also, indirectly, for the benefit

of the general depositors and creditors of the receivership

bank, in that the amount of the penalty required to be paid

by the surety under the bond to the commonwealth enabled

and permitted the other assets of the bank on hand at the

time of suspension and closing,—and constituting a trust

res,—to be applied toward the payment of the general de-

positors and creditors.

It thus follows, in consequence, that the general deposi-

tors and creditors are entitled ‘o retain the full benefit of

the assets constituting this trust res. Jt further follows

that the general creditors and depositors are not thereby

fortuitously obtaining a ‘‘windfall’’, and that they are only

realizing upon a potential asset bought and paid for by the

bank prior to suspension and for the presumed purpose of

meeting exactly the contingency, to wit, receivership, which

did occur.

If petitioner should be allowed, either by way of subroga-

tion or of implied indemnity,—to participate by way of

dividends upon the basis of a claim of $135,000, instead of

upon a claim measured by the amount expended under the

penalty of the bond, ($68,588.56) the petitioner would

thereby substantially cut into the assets constituting the

trust res retained for the benefit of the general depositors

and ereditors,—entirely contrary to, and beyond the meas-

ure permitted by, the surety bond. As well stated by the

court below in its opinion,

“The risk that the debtor bank might become insolrent

was the very thing which the surety company msured

agaist and presumably was paid for su duing. That

was the same risk which was taken by the unsecured

depositors in the bank who, along with the surety, now

seek an apportioned share of the bank’s assets. There

is only so much money to go around; the more one

gets the less someone else will receive. The surety

and the depositors shared the same risk. It seems fair

18

that they should share, in partial compensation for

their loss, on the same'basis. The basis on which the

depositors share is the proportion of their actual Joss,

the amount of their deposits. The surety’s actual loss

is the same that it paid out, which was $68,588.56.

This, we think, is the basis on which it is entitled to

claim.’’ (Italics inserted) (R. 30)

The State statutes under which the deposits in the instant

case were made, and in pursuance of which the bond was

given, will be found in the appendix hereof at p. 29.

It will be noted from the foregoing quotation from the

opinion of the court below, that the court considered that

the relation between the Commonwealth and the surety was

in the nature of that of insured and insurer. The same

conclusion has been reached by the Pennsylvania courts.

In Commonwealth v. U. S. F. & G. Co., (Pa. 1934) 170 Atl.

686, 688, the court said:

‘““* * * Read in the light of the statutory regulation

and of the object to be attained, the words used were

obviously intended to insure payment, and, therefore,

solvency of the bank —or, in other words, that the bank

would always be in condition to pay. Though termed

‘surety’, defendant is an insurer. South Phila. State

Bank v. National Surety Co., 288 Pa. 300, 305, 135 A.

748, and eases cited; also see the General Insurance

Act of 1921 (P. L. 682, sees. 661 to 665 [40 PS secs.

832-836|). The -purpose was to provide insurance of

state deposits. * * * Liability was not intended to de-

pend on the commonwealth's right to sue the bank; it

was intended, inter alia, to cover a receivership. South

Phila. State Bank’s Insolvency, 295 Pa. 433, 145 A.

520, 88 A. L. R. 1123; National Surety Co. v. Franklin

Trust Company (Pa. Sup.) 170 A. 683. Any other con-

struction would attribute to the parties an intention to

express their agreement in words that would satisfy

the statute, when, in fact, they intended tc disregard

it, an interpretation that cannot be tolerated. * * *”’

In Young v. American Bonding Co. (1910) 228 Pa. 373, 77

Atl. 623, 625, the court said:

19

‘©* * * Tn all essential particulars the appellee here is

an insurance company, and its obligation in this par-

ticular instance was that of an insurer. It was paid

for its undertaking; the amount of its compensation

being based on the calculation of risk assumed. * * *”’

In the case of In Re South Philadelphia State Bank’s In-

solvency, (1929), 295 Pa. 4338, 145 Atl. 520, the court was

considering the respective equities of a surety claiming sub-

rogation under a depository bond, and the general deposi-

tors and creditors of the bank. The particular point with

which the court was concerned in its discussion hereinafter

next quoted, was the right of the surety to be subrogated

>to the preferred status of the Commonwealth growing out

~-of its sovereign priority rights; and the conclusion was

there reached that such priority rights intended for the

henefit and protection of the sovereign, should not, in equity

and good conscience, be exercised by the surety, by subroga-

tion, to the prejudice and detriment of the general deposi-

tors and creditors of the receivership bank. The court said

(p. 521):

‘*Though the state of Pennsylvania has a sovereign

right of priority over all other creditors, it by no means

follows that, on the facts in this ease, such right would

pass to one in the position of appellant. It must be

reme:.ibered that appellant, a surety obtained and paid

by the insolvent bank, not by the commonwealth, claims

the right to enjoy the sovereign privileges of the latter,

and this under the equitable doctrine of subrogation;

the right claimed is to a preference over all other de-

positors of the bank. Since the right of priority of

the sovereign state exists pro bono populo, it follows

that, where a situation arises in which the state, hav-

ing been paid in full, is not immediately concerned, and

where the transfer of its right of priority would re-

sult in prejudice to one class of its citizens for the

benefit of another, it cannot be held that the good of

all the people would thus be served. It may well be

assumed that the ordinary depositor in a bank which

pat state deposits, knowing that, in event of the in-

solvency of the institution, the state has the right to

20

priority of payment, would likewise know that the laws

of Pennsylvania require all state deposits to be secured

by bonds with ample security thereon. Furthermore,

since the doctrine of subrogation is an equitable one,

the ordinary depositor might properly believe that, in

event of the insulvency of their depository, if no neces-

sity existed for the state to protect itself by exercising

its sovereign right to priority of payment, that right

would not be used to his prejudice, and, on such basis,

he would make, or continue, his deposits; therefore the

doctrine in question should not be allowed to operate

in a manner to produce prejudicial results to such de-

positors.

eo * ®

‘*We conclude that appellant surety company has the

equitable right to stand in the shoes of the common-

wealth as a depositor, but not to enjoy its right of pri-

ori‘y over other depositors. When the bank failed,

the commonwealth had all the rights of an ordinary

depositor; those rights passed by subrogation tu appel-

lant. The commonwealth had also the sovereign’s

right to priority of payment over other depositors,

but, owing to the peculiar nature of that right, it would

not pass by subrogation to appellant.’’

By way of analagous application to the instant case, of

the discussion contained in the foregoing quotation, it may

he observed:

(a) That although the surety company was there allowed

subrogation to the rights of the Commonwealth as a deposi-

tor, such allowance was based upon the fact that the surety

had paid the full amount of the deposit of the Common-

wealth in the receivership bank.

(b) Adopting, (but not quoting) and paraphrasing to the

extent considered appropriate, portions of the language

contained in the foregoing quotation, it seems fair to state,

by analogous application that:

It may well be assumed that the ordinary depositors

in a national bank in Pennsylvania which enjoys State

deposits, knowing that, in the event of the insolvency

of the bank, the State would enjoy, in effect, a pre-

~

21

ferred status in view of the fact that the laws of Penn-

sylvania require alt State deposits to be secured by

bonds with ample security thereon, and further, since

the doctrine of subrogation is an equitable one, the

ordinary depositors might properly believe that in

event of insolvency of their bank, the State would be

paid by the surety under the penalty of its bond (and

that such bond would be in double the amount of the

State’s deposit, as required by law) and that through

applicatiou of the doctrines of subrogation, the surety

might acquire such rights, remedies or securities as the

State possessed for the protection and enforcement of

its depository rights, and that under such cireum-

stances the depositors could safely continue their de-

posits in the bank, and that, in view of such circum-

stances, and upon the assumption that all requirements

of the State depository law had been made, the ordi-

nary depositors could well assume further that such

rights of subrogation as the surety might acquire

through payment of the deposit of the State, would not

be used to their prejudice nor to detract from nor di-

minish the vested rights which they had in the assets

possessed by the bank at the time of its failure and

suspension, constituting a trust res required by law to

be administered for the benefit of the depositors and

creditors of the bank.

It is only fair, of course, that the fact that petitioner is a

corporate surety should not be used as a basis of undue dis-

crimination, nor to deprive it of any rights to which it is

lawfully entitled, whether by way of subrogation or other-

wise. However, it is proper, in weighing the equities, to

have in mind the situation indicated by the Pennsylvania

Supreme Court in Young v. American Bonding Company,

(1910) 228 Pa. 373, 77 Atl. 623, 626, wherein the court said:

«* 6° 6 6*) 6 The trend of all our modern decisions, fed-

eral and state, is to distinguish between individual and

corporate suretyship where the latter is an undertaking

for money consideration by a company chartered for

the conduct of such business. In the one case the rule

of strictissimi juris prevails, as it always has. With

respect to the other, because it is essentially an insur-

22

ance against risk, underwritten for a money considera-

tion by a corporation adopting such business for its

own profit, the courts generally hold that such a com-

pany can be relieved from its obligation for suretyship

only where a departure from the contract is shown to

be a material variance. * ° *°”’

The above extract was quoted with approval in Sokoloff v.

Fidelity and Casualty Co., (1927) 288 Pa. 211, 135 Atl. 746;

In re Harr, (Pa. 8. Ct., 1935) 179 Atl. 725; and Penn R. Co.

v. Fidelity & Deposit Co., (C. C. A. 3d, 1936) 81 F. (2d) 526,

528. See also footnote 4, (R. 30) of the opinion of court be-

low (116 F’. (2d) 77), citing 12 A. L. R. 382 and 94 A. L. R.

876. @

O.

THE CASE OF MERRILL v. NATIONAL BANK OF

JACKSONVILLE, (1899) 173 U. 8. 131, RELIED

UPON BY PETITIONER, DOES NOT SUPPORT ITS

POSITION, BUT, TO THE EXTENT APPLICABLE

TO THE INSTANT CASE, SUPPORTS THE POSI-

TION OF RESPONDENT.

Petitioner relies also upon Merrill v. Nationai Bank of

Jacksonville, supra, to support its position. Analysis of

the case would seem to indicate that it does not support

petitioner's contentions, but that, to the extent that the Mer-

riul case is applicable, it supperts the contentions of respond-

ent.

(1) Analysis of the Merrill case:

The First National Bank of Palatka, Florida, was in

receivership. The National Bank of Jacksonv.ile,-Florida,

held a claim against the First National Bank, for approxi-

mately $10,000.00, secured by certain collateral, and sought

to prove its claim against the First National Bank in the

face amount of approximately $10,000.00 (the amouut of the

indebtedneas at the time of suspension of the First National

Bank) and to retain said collateral for future liquidation

and application, as permitted by law. The National Bank

23

of Jacksonville contended that it was entitled to receive

dividends from time to time upon said face amount of said

claim without surrendering to the receiver said collateral.

The receiver, by direction of the Comptroller of the Cur-

rency, refused to allow the claim, for dividend purposes, in

the face amount of approximately $10,000, and insisted (p.

132) that said creditor must, first ‘‘exhaust the collaterals

given to secure the certificate of deposit, and then * * * prove

for the balance due, after applying the proceeds of the col-

laterals in part payment’’. The issue thus raised, was, in

due course, presented to this Court for determination, on

appeal. This Court held:

(a) The assets of the insolvent bank constituted a trust

res for the benefit of all of its creditors, and a creditor, upon

proof of claim, acquired a vested interest in the trust res.

(pp. 136, 138).

(b) ‘*The distribution is to be ‘ratable’ on t! “ms

as proved or adjudicated, that is, on on e of

proportion applicable to all alike. In ore to be

‘ratable’ the claims must manifestly be estimated

as of the same point of time, and that date has

been adjudged to be the date of the declaration of

insolvency. White v. Knox, 111 U. S. 784.’ (p..

143.)

(c) In quoting from White v. Knox, 111 U. S. 784, this

Court said, in the Merrill case, (at p. 144 thereof) :

‘‘Mr. Chief Justice Waite, speaking for the court, said:

‘Dividends are to be paid to all creditors, ratably, that

is to say, proportionally. To be proportionate they

must be made by some uniform rule. They are to be

paid on all claims against the bank previously proved

and adjudicated. All creditors are to be treated alike.

The claim against the bank, therefore, must necessarily

be made the basis of the apportionment * * * The bus-

iness of the bank must stop when insolvency is declared.

Rev. Stat. sec. 5228. No new debt can be made after

that. The only claims the Comptroller can recognize

in the settiement of the atfairs of the bank are those

which are shown by proof satisfactory to him or by the

adjudication of a competent court to have had their

origin in something done before the insolvency. It is

24

clearly his duty, therefore, in paying dividends, to take

the value of the claim at that time as the basis of dis-

tribution’.’’ (p. 144)

‘‘In short, the secured creditor is not to be cut off

from his right in the common fund because he has taken

security which his co-creditors have not. Of course,

he cannot go beyond payment, and surplus assets or

so much of his dividends as are unnecessary to pay him

must be applied to the benefit of the other creditors.

And while the unsecured creditors are entitled to be

substituted as far as possible to the rights of secured

creditors, the latter are entitled to retain their securi-

ties until the indebtedness due them is extinguished."’

(p. 141)

‘‘Our conclusion is that the claims of creditors are

to be determined as of the date of the declaration of

insolvency, ‘vrespective of the question whether par-

ticular creditors have security or not. Wher secured

creditors have received payment in full, their right to

dividends, and their right to retain their securities

cease, but collections therefrom are not otherwise ma-

terial. Insolvency gives unsecured creditors no greater

rights than they had before, though through redemp-

tion or subrogation or the realization of a surplus

they may be benefited.’’ (p. 147)

(2) Comments and observations concerning the Merrill

case in so far as it may apply to, or may be distinguished

from, the instant case:

(a) As indicated by the court below (R. 28), the Merrill

ease ‘‘did not concern a surety and, therefore, is not di-

rectly in point here.’’ The instant case concerns ‘‘the rights

of a surety who has paid a part of a claim against a national

bank which is in liquidation’’, and the extent to which the

surety may be entitled to subrogation, if at all, by reason

of having paid a portion of the claim of the creditor pro-

tected by the bond. Such questions were not involved in

the Merrill case.

(b) In the Merrill case the secured creditor’s claim

against the bank was measured by the amount of its de-

25

posit balance as of the date of suspension of the bank. As

previously indicated herein (supra, p. 6), the claim of the

petitioner, as surety, should be measured by its claim

- against the bank as represented by the amount paid by pe-

titicner to the creditor to the extent required under the

bond. The bank does not owe petitioner the amount it orig-

inally owed the secured creditor ($135,000); it owes the

petitioner only the amount lawfully expended under the re-

quirements of the bond.

(c) In the Merrill case the court held, in effect, that when

dividends paid by the receiver, plus proceeds of liquidation

of collateral, equalled the amount of the creditor’s claim,

said claim would be discharged. The result under such cir-

cumstances would be that the remaining assets of the re-

ceivership would be retained for distribution to the general

depositors and creditors.

In the instant case no unliquidated collateral remained in

the hands of the Commonwealth, and consequently, there

was no basis of subrogation in that respect,

So far as subrogation to rights and remedies are con-

cerned, the situation is obviously different from what it

would have been if the secured creditor had held, as col-

lateral, a note or other obligation owing to the bank by a

third party, in which event it may be assumed, for dis-

cussion, that petitioner would have succeeded, by subroga-

tion, to the rights and remedy of the Commonwealth, as a

creditor, to pursue the collateral claim against the third

party for the purpose of applying it upon the bank’s indebt-.

edness to the Commonwealth. However, in the instant case,

the claim of the Commonwealth was against the bank, and

the claim of petitioner is against the bank. Therefore, it

would appear, in substance, that there is no res or corpus,

either by way of collateral or remedy to which petitioner

can be subrogated. Further, if full weight be given to the

established principle in the Merrill case that the claim of

the secured creditor is extinguished when fully paid by

dividends and realization upon collateral, it would seem to

26

follow that there remained no claim, on the part of the

Commonwealth, to which petitioner could be subrogated.

(d) The formal assignment executed by the Common-

wealth to petitioner would appear to have no bearing upon

the issues here involved. Obviously, under equitable doc-

trines, substance rather than form must be considered, and

petitioner cannot, through the form of an assignment, en-

hance or increase his claim against the insolvent bank to the

detriment and prejudice of the general depositors and cred-

itors. See: Withers v. D'Auria Bank & Trust Co. (1937),

122 N. J. Eq. 503, 195 Atl. 298; Meyers v. Bank of America

Nat. Trust & Savings Ass’r., et al. (1938), 77 Pac. (2d)

1084, 1086.

As stated by the court below:

‘*As a possible makeweight it can be added that the

surety in this case took an assignment from the credi-

tor, after the surety had paid the sum due the creditor.

This makeweight, however, has no added force since, at

the time of the assignment, the claim had been dis-

charged. We do not think that the assignment added

anything to the rights which the surety already had.

See Louisville Trust Co. v. Royal Indemnity Co., 230

Ky. 482, 20 S. W. (2d) 71 (1929).’’ (R. 29)

Our examination of the authorities indicates that the

issues involved in the instant case have not heretofore been

passed upon by this court. Counsel for petitioner appear to

have reached the same conclusion. However the decision of

the court below is in aceord with decisions in the closely

analogous eases of: Maryland Casualty Company v. Cor,

(C. C. A. 6, 1939) 104 F. (2d) 354; U.S. F. € G. Co. v. Hood,

(1934) 206 N. C. 639, 175.S. E. 185; Ward v. First Nat.

Bank of Caruthersville, (C. C. A. 8, 1935) 76 F. (2d) 256;

In re Kent Refining Co., (W. D. Mich., 1937) 20 F. Supp.

661.

Additional comments on cases cited by Petitioner will be

found in Appendix at p. 35.

27

V.

CONCLUSION.

The judgment of the court below should be affirmed.

Respectfully submitted,

GerorcE P. Barse,

(Counsel for Comptroller

the Currency),

Attorney for Respondents,

H. P. McFappen,

Bethlehem, Pennsylvania,

Of Counsel.

Lee Roy Srover,

Harritt BUCKINGHAM,

F. Ricnarp Burke, -

(Assistant Counsel for

Comptroller of the Currency),

Of Counsel.

of

28

VI.

APPENDIX.

Law Offices of

JosePH A. SLATTERY

123 South Broad Street

Philadelphia

October 10, 1941.

George P. Barse, Esq., General Counsel,

Office of Comptroller of the Currency,

Room 309, Treasury Building,

Washington, D. C.

Dear Sir:

You have asked us to clarify the record in the ma‘ter of

American Surety Company of New York v. Bethlehem Na-

tional Bank et al., now pending in the Supreme Court of the

United States, on the point whether the petitioner surety

company was a paid surety. Confirming our conversation

on the telephone today, we are writing to advise that pe-

titioner in this case was a paid surety. The respondent

Bank paid to it an annual bond premium to maintain in ef-

fect the bond of December 10, 1928, and the bond was in

effect and the Commonwealth's deposit was secured thereby

at the time of the appointment of the conservator on March

15, 1933, as averred in Paragraph 6 of the complaint (R. 3).

It is agreed between us that the foregoing facts may be

submitted to the Supreme Court of the United States for its

consideration to the same extent and effect as if included

in the formal transcript of record, and that our agreement

in this regard may be evidenced by the insertion of a copy

of this letter as an appendix of Respondents’ brief which

you are abont to file.

Yours very truly,

(Signed) Rutieper Suattery.

RS /hs

¢

29

Excerpt from Section 1102 of Act No. 274, approved June

7, A. D. 1923, known as the Administrative Code, as amended

by Act No. 164, approved April 13, A. D. 1927.

Section 1102. Board of Finance and Revenue. * * * the

Board of Finance and Revenue shall have the power and its

duty shall be:

(c) To select and designate as depositories for the State

moneys, banks, banking institutions or trust companies,

which are subject to nzetional or State supervision and each

of which

1. Has made written application to the State Treasurer

for a deposit of State moneys designating the amount of

deposit solicited and accompanying its application by a writ-

ten statement showing the amount of its capital actually

paid in, the amount of its surplus, the number of its stock-

holders, and whether its stock is well distributed or largely

held by a few individuals, and the length of time that said

institution has been engaged in business under its charter.

Each such statement shall be verified by the oath or affirma-

tion of the president, cashier or trust officer as the case

may be, and the State Treasurer shall present the same to

the Board for its consideration within thirty days after the

receipt thereof, provided, that where the selection of any

bank, banking institution or trust company as a depository

of State moneys has been made by the former Revenue

Commissioners and the Banking Commissioner, or a ma-

jority of them as heretofore provided by law such selection

and the deposit made in accordance therewith in such bank,

banking institution or trust company shall in no way be

affected by the failure of such bank, banking institution or

trust company to have made application in the manner

herein provided but it shall be the duty of the depository

so selected to furnish on request the information aforesaid

verified in the manner stated.

2. Shall upon the receipt of notice of its selection as a

depository of State moneys furnish a bond to secure pay-

ment of deposits and interest to the Commonwealth of Penn-

sylvania with a proper warrant of attorney to confess judg-

ment in favor of the Commonwealth secured by a surety

company or individual sureties to be approved by the board

in the amount of the deposit to be made. If a corporate

bond be given no one surety company shall be approved in

an aggregate amount in excess of five times its capital, sur-

30

plus and reserve. Provided, that in lieu of the surety bonds

of surety companies or of individuals as aforesaid the

deposit of State moneys may be secured by the deposit with

the State Treasurer, of United States, municipal or county

bonds to be approved by the board in an amount measured

by their actual market value equal to the amount of deposit

so secured and twenty per centum in addition thereto. Said

bonds shall be accompanied by proper assignment or Power

of Attorney to transfer the same and said trust deposit of

securities shall be maintained on request at the amount

aforesaid in case of any depreciation in the value thereof.

3. Agree to pay interest upon all State deposits at the

rate of not less than two per centum per annum upon active

deposits and not less than three per centum per annum

upon non-active deposits, and that all collections shall be

made for the Commonwealth without cost or compensation.

(f) To see that no bank, banking institution or trust com-

pany shall receive a deposit of State moneys in excess of

twenty-five per centum of its paid-in capital and surplus,

or have at any one time an aggregate of deposits in excess

of five hundred thousand dollars. This section shall not

apply to institutions to be designated by the board as active

depositories of State funds subject to daily check by the

State Treasurer, but at no time shall the combined deposits

in i active depositories exceed the total sum of ten million

dollars.

7 31

ADDITIONAL CASES ON SUBROGATION.

Old National Bank v. Swearing, 72 S. W. (2d) 545, 548 &

049; 167 Tenn. 529

FACTS: Life tenant under will borrowed money to

pay taxes and improve property. Gave

ank a note secured by mortgage. It was

claimed that life tenant did not have the

power under the will to mortgage property

and bank contended that if the mortgage

was not valid they should be subrogated

to the claims of the lienors whose demands

were discharged.

HELD: As to the lien for repairs, there was no sub-

rogation as said lien had expired prior to

the payment by the bank.

As to the lien for taxes, the bank could not’

be subrogated as search of title would

have disclosed that in a prior proceeding

it was determined that the life tenant did

not have the power to incumber property,

so the bank was guilty of such culpable

negligence as to preclude any favor at the

hands of the Court of Equity.

Morrah vy. First National Bank, 65 S. W. (2d) 830, 831

(1932)

QUESTION: Right of bank to become subrogated to first

mortgage lien which was discharged and

-paid by bank upon faith of release of note

secured by second mortgage holder who,

in fact, had sold note prior to release.

Second mortgage holder attempted to have

said mortgage declared a first and prior

lien.

HELD: Bank not guilty of culpable negligence, but

if so would not have been entitled to sub-

rogation which was granted in this case.

Also, no showing that the right of the sec-

ond mortgage holder was prejudiced and

thus subrogation was not denied.

32 ~.

Wallace v. Benner, (1931) 156 S. E. 795, 799

“The exceptions to the general rule to the doc-

trine of subrogation: (1) The relief is not granted to

a volunteer; (2) nor where the party claiming relief

is guilty of culpable negligence; (3) nor where to grant

relief will operate to the prejudice of the junior lien-

holder.”’

However, the facts in this case did not come in any of

the above exceptions, and the subrogation was granted.

4d

Huey v. Brand, (1936) 92S. wi 508, 507

FACTS: The tax collector illegally deposited funds in

the bank and the president of the bank and

another executed a surety bond. Upon

failure of the bank, Huey paid the state

and was allowed a general claim against

the bank.

The present action is for the purpose of

establishing a preferred claim on the

theory that Huey was entitled to the right

of subrogation to the preferential right of

the sovereignty, which was denied.

‘“‘The rule of preferential right of sovereignty

to be paid ahead of its citizens comes from monarchial

Europe. It is held to be transferred therefrom into the

law of democratic America by the legislative adoption

of the English common law. It was a prerogative that

belonged to ancient kings, before justice for the com-

mon man was born. If it may be justified as a cold

legal formula, now a part of American jurisprudence,

we doubt that either its origin, or the result of its ap-

plication to the average bank failure, is such as to pro-

duce enthusiasm or profound respect in the modern

judicial mind of this country. This much is said to

show that c arts should recognize its binding force in

any form only in a clear case. Concerning it the Su-

preme Court of Pennsylvania has held: ‘The proper

rule is that the state’s right to a preference over other

creditors, b+! ig a sovereign right enjoyed for the bene-

fit of all the people, cannot be transferred to individuals

except by express legislative sanction.’ In re South

33 ,

Philadelphia State Bank’s Insolvency, 295 Pa. 433, 145

A. 520, 83 A. L. R. 1123, at page 1125. However, we

need not announce such as the Texas rule Upon equit-

able principles more hoary with age than Anglo Saxon

jurisprudence, Huey is not entitled to the right of sub-

regation, conceding the preferential right of sov-

ereignty, and that same may be transferred to an indi-

vidual. We quote some of these:

‘Subrogation does not owe its origin to statute or

custom, nor is it a doctrine of the common law. It

originated in equity and is a creature of equity, a

doctrine of equity jurisprudence which was adopted

by equity from the Roman or the civil law. * * *

‘Subrogation is founded upon principles of justice

and equity and rests upon the principle that substan-

tial justice should be attained regardless of form. Its

basis is the doing of complete, essential and perfect

justice between all the parties without regard to

form. * * *

‘It will not be enforced unless there is some equit-

able doctrine upon which it can be predicated, and

only when the applicant therefor has an equity to in-

voke and his cause is just and its enforcement is con-

sonant with right and justice, and then only in a clear

case. It will not be allowed where it would be contrary

to public policy, or where it would accomplish by indi-

rection that which a statute forbids to be done by

direction. * * *

‘Nor can the doctrine be extended so as to author-

ize the application of the principle for the relief and

benefit of a party who ‘aluaasthe surrenders a right

or suffers An injury, the consequence of his own will-

ful neglect or wrong, or who has connived at and as-

sisted in the wrong, for one seeking subrogation must

come into court with clean hands. * * *

‘The person seeking subrogation must act fairly

and equitably and be free from fault. It will not be

allowed where he has intermeddled with the rights

of others, or is guilty of fraud or culpable negligence,

or where he would derive an advantage from, or

establish his claim through, his own negligence, or,

in any way, would thereby reap advantage from his

own wrongdoing. * * *

34

‘Subrogation will be granted only where an equita-

ble result will be reached. It will not be allowed when

to do so would be inequitable or where it would ac-

complish injustice.’ 60 C. J. pp. 696, 697, 698, 699,

701, 702, 707, 708 and 709.

‘‘See, also, Padgett v. Young County (Tex. Civ.

App.) 204 S. W. 1046; 60 C. J. p. 729.

‘‘In this case Huey openly flaunted the law of the

state and violated his oath of office by devositing state

funds illegally. A. P. Borger conspired with him in

this high-handed act. Now both are before a court of

equity, claiming in effect a right of preference over the

individual depositors of the Borger State Bank, based

upon their own wrongd. ag. Who would pay Huey if

his claim be allowed? Obviously the general depositors

would contribute. Laborers, bended with toil, gingham-

clad washer women, the aged, the infirm, even the or-

phan—these a part of the usual run of bank depositors

are to be made to enlarge the bank account of Huey and

enrich the estate of A. P. Borger. This consequence is

claimed to flow directly from a violation of Huey’s offi-

cial duty in making an illegal] deposit with Borger's

bank. We confess little enthusiasm or respect for the

rule which gives the state the iegal right to take the

assets of an insolvent bank from the above class, and

none at all for the rule invoked by both Huey and

Borger’s estate in this case. That it would work a loss

and grave injustice to the general depositors of the

Borger State Bank is, to our mind, as clear as sunlight.

Such a contention was rejected by the Pennsylvania Su-

preme Court upon the same reasoning we use here. In

re South Philadelphia State Bank’s Insolvency, 295 Pa.

433, 145 A. 520, 83 A. L. R. 1123.

‘‘The judgment of the trial court allowing the Huey

claim as a preference is hereby reversed and rendered

in favor of the Banking Commissioner.”’

39

ADDITIONAL COMMENTS ON CASES CITED BY

PETITIONER.

Fouts v. Maryland Casualty Co. (C. C. A. 4th, 1939) 30 F.

(2d) 357.

The opinion discloses at pg. 359 that the surety company

was asking for the allowance of an indemnity claim and

payment of bank dividends thereon before the State Treas-

urer had received all the dividends due on the state’s claim,

the court stating:

‘Tt is shown by the record that Mr. Lacy has not yet

received all his dividends, in fact there is a considera-

ble sum in the receiver’s hands to be distributed, yet

the court permits the proving and filing of the casualty

company’s claim for a certain fixed amount necessarily

greater than the company’s final loss.’’

The above statement indicates that expressions in the last

paragraph of the opinion of the court with respect to the

surety’s right of subrogation cannot be determinative of

the question involved in the instant case and must be con-

sidered as dicta.

American Surety Co. v. De Carle, (C. C. A. 9th, 1928) 25

F. (2d) 18.

In this case the full amount of the depository bond was

paid by the surety and left unpaid a substantial amount of

the County Treasurer’s deposit in the bank. However, the

surety, basing its claim against the receiver on its indemnity

agreement, sought allowance of a claim for dividend pur-

poses before the Treasurer was paid in full. The court de-

nied the surety’s claim based on the indemnity agreement

and indicated the surety’s only right would be that of sub-

rogation after the claim of the County Treasurer was sat-

isfied. Clearly, the court’s statements with respect to sub-

rogation, though relied upon by the petitioner, were merely

dicta in this case.

City of Oakland v. Hartford Accident & Indemnity Co..

(C. C. A. 6th, 1936) 81 F. (2d) 717.

The City sued the surety to enforce payment upon a de-

pesitory bond covering funds deposited in a state bank by

the City. Upon suspension of the bank, the City in a prior

36 -

suit in the state courts was denied a claim for dividend pur-

poses for the full amount of the City’s deposit, the state

court requiring a deduction of the proceeds of pledged bonds

in determining the amount of the City’s claim for dividend

purposes. This case in the Federal court was a suit by the

City against the surety company only, to recover the de-

ficiency after applying the proceeds of the collateral and a

dividend. The court held judgment should have been ren-

dered against the surety for the difference between its lia-

bility on the bond nd that portion of the deposit for which

the City had been compensated by application of the divi-

dend payment and the collateral proceeds. As the surety

had never paid its obligation on the bond, no questions of

subrogation were before the court for consideration. As

to that portion of the court’s opinion holding the City was

entitled to receive a dividend upon the full amount of the

claim without deducting the value of the collateral, it will

be noted that this point was res adjudicata, in view of the

previous decision by the state court to the contrary.

In re Thompson (W. D. Pa. 1924), 300 Fed. 215.

A brief statement of the facts in the above entitled case

will show that the holding of the court is not applicable to

the facts of the instant case. In that case the holder of

fifteen promissory notes compelled an indorser to pay the

entire indebtedness. The indorser then assigned his

claim for value to the Federal Security Company, which

proved the claim against a co-indorser’s bankrupt estate.

Two other co-indorsers were insolvent. Held: That the

Company was entitled to dividends on the entire claim as

proved, for as a surety it was subrogated to the rights of

the principal debtor.

It will be noted that the entire debt was paid by the

surety; that the surety’s claim was filed against a bankrupt

estate; and there was not involved a question of the con-

struction of the ratable distribution provisions of the Na-

tional Bank Act. The case involved the rights of an in-

dividual surety, as distinguished from a corporate surety.

The Pennsylvania courts in a long line of decisions have

held that the rule of strictissimi jurts in favor of an individ-

ual surety does not apply to a contract of suretyship by a

corporation, underwritten for a money consideration for

profit. Young v. American Bonding Co., (1910) 228 Pa.

373, 77 Atl. 623; Shaw v. New Amsterdam Cas. Co., (1933)

37

310 Pa. 213, 164 Atl. 916; Dairymen’s Co-operative Sales

Co. v. Maryland Cas. Co., (1934) 11 F. Supp. 423, aff. C. C.

A. 78 F. (2) 1014; Justice v. Empire State Surety Co., (Pa.

1913) 209 Fed. 105, aff. 218 F. 802.

Lidderdale’s Executors vy. Executor of Robinson, (1827) 25

U.S. 594.

The question involved was whether a joint endorser of a

bil! of exchange who had paid more than his share was en-

titled to priority of payment under the Virginia law against

the estate of a co-endorser. The Wirginia act provided that

protested bills of exchange had equal dignity with a judg-

ment after the death of the drawer or endorgezr and the

executors or administrators shall suffer judgment to pass

against them for all debts due upon a protested bill of ex-

change before payment of other debts of inferior dignity.

The court granted priority to the endorser in the amount

by which his payments had exceeded bis share of the debt.

The case does not appear to involve a problem of subroga-

tion of a surety to rights of a creditor in the distribution of

assets of an insolvent national bank under a ratable distri-

bution statute, as no statutory priority of payment against

an insolvent national bank is possible under the decisions

of this court. Cook County National Bank v. U. S., (1882)

107 U. S. 445; Davis v. Elmira Savings Bank, (1896) 161

U. S. 275; Old Company’s Lehigh v. Meeker, (1935) 294

U. S. 227: Jennings v. U. S. F. & G. Co., (1935) 294 U.S.

216.